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EX-31.2 - EXHIBIT 31.2 - Resource REIT, Inc.rreoii-20150930xex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource REIT, Inc.rreoii-20150930xex311.htm
EX-32.2 - EXHIBIT 32.2 - Resource REIT, Inc.rreoii-20150930xex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource REIT, Inc.rreoii-20150930xex321.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-55430


Resource Real Estate Opportunity REIT II, Inc.   
(Exact name of registrant as specified in its charter)
Maryland
 
80-0854717
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)
 
 (215) 231-7050
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R No  o  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer                  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
As of November 9, 2015, there were 36,312,406 outstanding shares of common stock of Resource Real Estate Opportunity REIT II, Inc.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 
 
PAGE
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 






Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We have a limited operating history. As of September 30, 2015, we owned seven multifamily properties. Because we have not identified any additional real estate assets to acquire with proceeds from our initial public offering we are considered a blind pool, and our stockholders will not have an opportunity to evaluate our investments before we make them, making an investment in us more speculative.
We are dependent on our advisor to select investments and conduct our operations. Our advisor has no prior operating history and no prior experience operating a public company. This inexperience makes our future performance difficult to predict.
Our executive officers and some of our directors are also officers, directors, managers or key professionals of our advisor, our dealer manager and other affiliated Resource Real Estate entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other programs sponsored by Resource Real Estate and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
We pay substantial fees to and expenses of our advisor, its affiliates and participating broker-dealers, which payments increase the risk that our stockholders will not earn a profit on their investment.
Our advisor and its affiliates will receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us.
There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would exceed 300% of our net assets unless a majority of the members of our conflicts committee find substantial justification for borrowing a greater amount.
We may lack property diversification if we do not raise a substantial amount of proceeds in our initial public offering.
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable.
We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our sponsor, which could limit our ability to make distributions and could decrease the value of an investment in us.
Disruptions in the financial markets and sluggish economic conditions could adversely affect our ability to implement our business strategy and generate returns to our stockholders.
Our failure to qualify as a REIT for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.
Investments in non-performing real estate assets involve greater risks than investments in stabilized performing assets and make our future performance more difficult to predict.
All forward-looking statements should be read in light of the risks described above and identified in the “Risk Factors” section of our Registration Statement on Form S-11 (File No. 333-184476) filed with the Securities and Exchange Commission (the “SEC”), as the same may be amended and supplemented from time to time.



PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED BALANCE SHEETS
 
 
September 30,
2015
 
December 31,
2014
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental property, net
 
$
223,455,868

 
$
54,703,305

Identified intangible assets, net
 
2,657,199

 
1,176,061

 
 
226,113,067

 
55,879,366

 
 
 
 
 
Cash
 
142,101,110

 
15,780,579

Restricted cash
 
3,150,701

 
725,305

Tenant receivables
 
31,739

 
5,746

Due from related parties
 
480,453

 
34,025

Subscriptions receivable
 
3,537,756

 
3,819,991

Prepaid expenses and other assets
 
715,018

 
774,338

Deferred offering costs
 
4,581,135

 
3,618,954

Deferred financing costs, net
 
1,732,003

 
581,783

Total assets
 
$
382,442,982

 
$
81,220,087

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable
 
$
112,877,872

 
$
38,540,000

Accounts payable and accrued expenses
 
3,475,233

 
857,897

Due to related parties
 
1,844,134

 
3,851,263

Tenant prepayments
 
172,959

 
30,704

Security deposits
 
307,415

 
68,696

Distributions payable
 
4,555,957

 
259,379

Derivative liability
 
380,874

 

Total liabilities
 
123,614,444

 
43,607,939

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock (par value $.01, 10,000,000 shares authorized, none issued and outstanding)
 

 

Convertible stock (par value $.01; 50,000 shares authorized, 50,000 issued and outstanding)
 
500

 
500

Common stock (par value $.01; 1,000,000,000 shares authorized, 32,689,955 and 4,759,567 issued and outstanding, respectively)
 
326,430

 
47,596

Additional paid-in capital
 
291,123,856

 
42,148,473

Accumulated other comprehensive loss
 
(134,330
)
 
(34,468
)
Accumulated deficit
 
(32,487,918
)
 
(4,549,953
)
Total stockholders’ equity
 
258,828,538

 
37,612,148

Total liabilities and stockholders’ equity
 
$
382,442,982

 
$
81,220,087

 The accompanying notes are an integral part of these consolidated financial statements.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental income
$
3,871,888

 
$
342,437

 
$
8,303,029

 
$
455,076

Interest income
41,888

 
1,505

 
86,973

 
1,787

Total revenues
3,913,776

 
343,942

 
8,390,002

 
456,863

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operating
2,245,165

 
230,517

 
4,432,909

 
270,542

Acquisition costs
3,018,033

 
60,053

 
5,177,264

 
329,444

Management fees - related parties
650,989

 
8,683

 
1,356,192

 
59,228

General and administrative
668,544

 
430,186

 
2,216,195

 
1,117,506

Loss on disposal of assets
658,606

 

 
1,669,835

 
198,840

Depreciation and amortization expense
2,405,596

 
193,910

 
5,187,261

 
277,249

Total expenses
9,646,933

 
923,349

 
20,039,656

 
2,252,809

 Loss before other expense
(5,733,157
)
 
(579,407
)
 
(11,649,654
)
 
(1,795,946
)
 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Interest expense
(1,098,071
)
 
(53,523
)
 
(1,551,004
)
 
(69,880
)
Net loss
(6,831,228
)
 
(632,930
)
 
(13,200,658
)
 
(1,865,826
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Designated derivative, fair value adjustment
(58,063
)
 
(2,300
)
 
(99,862
)
 
(9,904
)
Comprehensive loss
$
(6,889,291
)
 
$
(635,230
)
 
$
(13,300,520
)
 
$
(1,875,730
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
28,626,472

 
988,610

 
18,591,955

 
827,730

 
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(0.24
)
 
$
(0.64
)
 
$
(0.71
)
 
$
(2.25
)















The accompanying notes are an integral part of these consolidated financial statements.




 
RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(unaudited)


 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, at January 1, 2015
 
4,759,567

 
$
47,596

 
50,000

 
$
500

 
$
42,148,473

 
$
(34,468
)
 
$
(4,549,953
)
 
$
37,612,148

Issuance of stock
 
27,190,220

 
271,432

 

 

 
270,723,245

 

 

 
270,994,677

Distributions of common stock
 
226,811

 
2,268

 

 

 
2,265,029

 

 
(2,267,297
)
 

Syndication costs
 

 

 

 

 
(28,882,548
)
 

 

 
(28,882,548
)
Common stock issued through distribution reinvestment plan
 
518,399

 
5,184

 

 

 
4,919,607

 

 
(4,924,791
)
 

Distributions declared
 

 

 

 

 

 

 
(7,545,219
)
 
(7,545,219
)
Share redemptions
 
(5,042
)
 
(50
)
 

 

 
(49,950
)
 

 

 
(50,000
)
Designated derivative, fair value adjustment
 

 

 

 

 

 
(99,862
)
 

 
(99,862
)
Net loss
 

 

 

 

 

 

 
(13,200,658
)
 
(13,200,658
)
Balance, at September 30, 2015
 
32,689,955

 
$
326,430

 
50,000

 
$
500

 
$
291,123,856

 
$
(134,330
)
 
$
(32,487,918
)
 
$
258,828,538






























The accompanying notes are an integral part of this consolidated financial statement.




RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended 
 September 30
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(13,200,658
)
 
$
(1,865,826
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Loss on disposal of assets
 
1,669,835

 
198,840

Depreciation and amortization
 
5,187,261

 
277,249

Amortization of deferred financing costs
 
182,341

 
5,360

Amortization of fair value adjustment of debt
 
(20,449
)
 

Change in fair value of interest rate swap
 
380,874

 

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(1,019,682
)
 
(321,555
)
Tenant receivables, net
 
(25,993
)
 
(1,689
)
Due from related party
 
(248,997
)
 
(37,057
)
Prepaid expenses and other assets
 
444,018

 
(70,921
)
Due to related parties
 
(985,797
)
 
961,300

Accounts payable and accrued expenses
 
2,469,230

 
258,683

Tenant prepayments
 
125,250

 
17,431

Security deposits
 
(3,808
)
 
218

Net cash (used in) provided by operating activities
 
(5,046,575
)
 
(577,967
)
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Property acquisitions
 
(151,398,454
)
 
(9,446,990
)
Capital expenditures
 
(4,821,776
)
 
(58,395
)
Net cash (used in) provided by investing activities
 
(156,220,230
)
 
(9,505,385
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock, net of redemptions
 
270,944,677

 
16,720,046

Payment of deferred financing costs
 
(1,332,561
)
 
(163,674
)
Deferred offering costs
 
(2,269,763
)
 
(602,141
)
Subscriptions receivable
 
282,235

 

Increase in borrowings
 
52,200,000

 
8,787,000

Repayments on borrowings
 

 
(1,322,000
)
Purchase of interest rate caps
 
(86,830
)
 
(9,904
)
Distributions paid on common stock
 
(3,248,641
)
 
(14,404
)
Syndication costs
 
(28,901,781
)
 
(1,945,755
)
Net cash (used in) provided by financing activities
 
287,587,336

 
21,449,168

 
 
 
 
 
Net increase in cash
 
126,320,531

 
11,365,816

Cash at beginning of period
 
15,780,579

 
200,644

Cash at end of period
 
$
142,101,110

 
$
11,566,460


The accompanying notes are an integral part of these consolidated financial statements.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS (LOSS)
Resource Real Estate Opportunity REIT II, Inc. (the “Company”) was organized in Maryland on September 28, 2012. The Company is offering up to 100,000,000 shares of common stock in its primary initial public offering for $10 per share, with volume discounts available to investors who purchase $1.0 million or more of shares through the same participating broker-dealer. Discounts are also available for other categories of investors. The Company is also offering up to 10,000,000 shares pursuant to the Company’s distribution reinvestment plan at a purchase price initially equal to $9.50 per share. The Company has adopted a fiscal year ending December 31. On February 6, 2014, the Securities and Exchange Commission (the “SEC”) declared effective the Company's Registration Statement on Form S-11, as amended (Commission File No. 333-184476) (the “Registration Statement”), relating to the offering of up to 110,000,000 shares of the Company’s common stock, including shares offered pursuant to the Company's distribution reinvestment plan.
Resource Real Estate Opportunity Advisor II, LLC (the "Advisor”) is a wholly owned subsidiary of Resource Real Estate, Inc. (the "Sponsor") and an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors. The Advisor acts as the Company's external advisor and manages the Company's day-to-day operations and its portfolio of real estate investments and provides asset-management, marketing, investor relations and other administrative services on the Company's behalf, all subject to the supervision of the Company's Board of Directors. On October 9, 2012, the Advisor contributed $200,000 to the Company in exchange for 20,000 shares of common stock. On December 20, 2013, the Advisor received 50,000 shares of convertible stock in exchange for 5,000 shares of the Company’s common stock. The Advisor purchased an additional 117,778 shares of common stock in 2014 for $1.1 million.
As of September 30, 2015, a total of 32,433,632 shares, including additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan, have been issued in connection with the Company's public offering resulting in gross offering proceeds of $322.9 million. As of September 30, 2015, the Company had issued 541,013 shares for $5.1 million pursuant to its distribution reinvestment plan.
The Company’s objective is to take advantage of the Sponsor's dedicated multifamily investing and lending platforms to invest in multifamily assets across the entire spectrum of investments in order to provide stockholders with growing cash flow and increasing asset values. The Company’s targeted portfolio will consist, at the time of acquisition, of commercial real estate assets, principally (i) underperforming multifamily rental properties which the Company will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which the Company will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans the Company originates or purchases either directly or with a co-investor or joint venture partner.
The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2014. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes at least 100% of its REIT taxable income to its stockholders. The Company also intends to operate its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
The consolidated financial statements and the information and tables contained in the notes thereto, as of September 30, 2015, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three and nine months ended September 30, 2015 may not necessarily be indicative of the results of operations for the full year ending December 31, 2015.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary
 
Apartment Complex
 
Number
of Units
 
Property Location
RRE Opportunity Holdings II, LLC
 
N/A
 
N/A
 
N/A
RRE Opportunity OP II, LP
 
N/A
 
N/A
 
N/A
RRE Bear Creek Holdings, LLC, or Bear Creek
 
Adair off Addison
 
152
 
Dallas, TX
RRE Oak Hill Holdings, LLC, or Oak Hill
 
Overton Trails Apartment Homes
 
360
 
Fort Worth, TX
RRE Buckhead Holdings, LLC, or Buckhead
 
Uptown Buckhead
 
216
 
Atlanta, GA
RRE Farrington Holdings, LLC, or Farrington
 
Farrington Lake
 
411
 
Chapel Hill, NC
RRE Mayfair Chateau Holdings, LLC, or Mayfair Chateau
 
Mayfair Chateau
 
274
 
Homewood, AL
RRE Fairways of Bent Tree Holdings, LLC, or Fairways of Bent Tree
 
Fairways of Bent Tree
 
200
 
Dallas, TX
RRE Spalding Crossing Holdings, LLC, or Spalding Crossing
 
Spalding Crossing
 
252
 
Atlanta, GA
RRE Montclair Terrace Holdings, LLC, or Montclair Holdings
 
Montclair Holdings
 
188
 
Portland, OR

N/A - Not Applicable
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate Investments
The Company records acquired real estate at fair value. The Company considers the period of future benefit of an asset to determine its appropriate useful life. The Company's estimated useful lives of its assets by class are as follows:
Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Remaining term of related lease
As three of our multifamily properties are located in the Dallas-Fort Worth area and two of our properties are located in Atlanta, our portfolio is currently particularly susceptible to adverse economic developments in these real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. The Company did not recognize any impairment charges as of September 30, 2015.
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, the Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports, along with the aforementioned information available to the Company's management, is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and relationship intangibles related to that customer would be charged to expense in that period.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. These estimates are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.
The specific timing of a sale is measured against various criteria related to the terms of the transaction and any continuing involvement associated with the property. If the criteria for profit recognition under the full-accrual method are not met, the Company defers the gain recognition and accounts for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment or cost recovery methods, as appropriate, until the appropriate criteria are met.
The future minimum rental payments to be received from noncancelable operating leases are $12.4 million and $177,343 for the 12-month periods ending September 30, 2016 and 2017, and none thereafter.
Tenant Receivables
The Company makes estimates of the collectability of its tenant receivables related to base rents, including straight-line rentals, expense reimbursements and other revenue or income. The Company specifically analyzes accounts receivable and historic bad debts, tenant creditworthiness, current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year.
Income Taxes
The Company elected to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, the Company’s TRSs may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. Due to reported losses for the current periods presented, the convertible shares (discussed in Note 12) are not included in the diluted earnings per share calculation, as they would be anti-dilutive. All common shares and per common share information in the financial statements have been adjusted retroactively for the effect of one 0.625% stock distribution issued on July 14, 2014, one 1.00% stock distribution issued October 15, 2014, one 0.83333% stock distribution issued on January 15, 2015, one 0.5% stock distribution issued on April 15, 2015, and one 0.5% stock distribution issued on July 15, 2015.
Organization and Offering Costs
The Company incurs organizational, accounting, and offering costs in pursuit of its financing. Organization and offering costs (other than selling commissions and dealer-manager fees) of the Company are paid by the Advisor on behalf of the Company. Organization costs are expensed as incurred and include all expenses incurred by the Company in connection with the formation of the Company, including, but not limited to, legal fees and other costs to incorporate the Company.
Pursuant to the Amended and Restated Advisory Agreement between the Company and the Advisor dated January 9, 2014, as amended (the “Advisory Agreement”), the Company is obligated to reimburse the Advisor for organizational and offering costs it incurs on the Company's behalf, but only to the extent that such reimbursements will not cause organizational and offering expenses (other than selling commissions and the dealer manager fees) to exceed 2.5% of the gross offering proceeds raised in the offering, when recorded by the Company. As of September 30, 2015, a total of $1.1 million in reimbursable organizational and offering costs incurred on behalf of the Company by the Advisor has yet to be reimbursed by the Company. These costs are included in due to related parties on the consolidated balance sheet as of September 30, 2015.
Deferred Offering Costs
Through September 30, 2015, the Company has incurred $7.9 million for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal and similar costs. As of September 30, 2015, the Advisor has advanced $4.4 million of these costs on behalf of the Company. A portion of these costs is charged to equity upon the sale of each share of common stock sold under the public offering. Similarly, a portion of the proceeds received from the sales of shares in the Company's public offering was paid to the Advisor to reimburse it for the amount incurred on behalf of the Company. Deferred offering costs represent the portion of the total costs incurred that have not been charged to equity to date. As of September 30, 2015, the Company has reimbursed $3.3 million of deferred offering costs to the Advisor. Upon completion of the public offering, any deferred offering costs in excess of the limit on organization and offering costs discussed above, will be charged back to the Advisor.
New Accounting Standards
Accounting Standards Issued But Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers” ("ASU No. 2014-09"), which will replace most existing revenue recognition guidance in GAAP. The core principle of ASU No. 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU No. 2014-09 will be effective for the Company beginning January 1, 2018, including interim periods in 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of ASU No. 2014-09 on the Company's consolidated financial position, results of operations and cash flows.
    


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


In August 2014, FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." Under the new guidance, an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the Company's consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (“ASU No. 2015-01”). The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendment will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU No. 2015-01 to have a significant impact on its financial statements.
In February 2015, FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-02 to have a significant impact on its consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-03 to have a significant impact on its consolidated financial statements.
In September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which eliminates the requirement to retroactively revise comparative financial information for prior periods presented in financial statements due to changes in provisional amounts recorded for acquisitions in subsequent periods. Upon adoption, disclosure of the amounts recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date are required. ASU 2015-16 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-16 to have a significant impact on its consolidated financial statements.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION    
The following table presents supplemental cash flow information:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Non-cash operating, financing and investing activities:
 
 
 
Cash distributions on common stock declared but not yet paid
$
4,555,957

 
$
259,379

Stock issued through distribution reinvestment plan
4,924,791

 
34,648

Stock distributions issued
2,267,297

 
23,501

Deferred offering costs
1,307,582

 
(2,177,551
)
Due to related parties
1,218,763

 
2,177,551

Mortgage notes payable assumed
21,439,301

 

Fair value adjustment of debt assumed
719,020

 

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
611,930

 
$
48,800

NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. A summary of the components of restricted cash follows:
 
September 30,
2015
 
December 31,
2014
Real estate taxes
$
985,445

 
$
128,871

Insurance
212,824

 
157,600

Capital improvements
1,919,459

 
438,834

Other
32,973

 

 
$
3,150,701

 
$
725,305

NOTE 5 - RENTAL PROPERTY, NET
The Company’s investment in rental properties consisted of the following:
 
September 30,
2015
 
December 31,
2014
Land
$
31,442,331

 
$
6,723,368

Building and improvements
189,159,363

 
47,546,786

Furniture, fixtures and equipment
4,156,135

 
612,846

Construction in progress
1,645,773

 


226,403,602

 
54,883,000

Less: accumulated depreciation
(2,947,734
)
 
(179,695
)

$
223,455,868

 
$
54,703,305

    
Depreciation expense for the three and nine months ended September 30, 2015 was $1.4 million, and $2.8 million, respectively. Depreciation expense for the three and nine months ended September 30, 2014 was $76,790 and $101,567, respectively.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 6 - ACQUISITION
As of September 30, 2015, the Company owned seven properties. In order to finalize the fair values of the acquired assets and liabilities, the Company obtained third-party appraisals. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. All valuations have been finalized as of September 30, 2015.
The table below summarizes these acquisitions and the respective fair values assigned:    
Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Purchase
Price (1)
 
Land
 
Building and
Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Other
Liabilities
 
Fair Valued
Assigned
Adair off Addison
 
Dallas, Texas
 
6/4/2014
 
$
9,500,000

 
$
1,888,982

 
$
7,060,815

 
$
198,840

 
$
351,363

 
$
(84,732
)
 
$
9,415,268

Overton Trails Apartment Homes
 
Fort Worth, Texas
 
12/19/2014
 
47,000,000

 
4,834,386

 
40,485,971

 
503,582

 
1,176,061

 
(59,977
)
 
46,940,023

Uptown Buckhead
 
Atlanta, Georgia
 
3/30/2015
 
32,500,000

 
6,464,391

 
24,992,651

 
399,036

 
643,922

 
(117,170
)
 
32,382,830

Farrington Lake
 
Chapel Hill, North Carolina
 
5/19/2015
 
46,750,000

 
7,097,585

 
37,946,732

 
608,364

 
1,097,319

 
(231,249
)
 
46,518,751

Mayfair Chateau
 
Homewood, Alabama
 
8/21/2015
 
30,050,000

 
3,595,001

 
25,996,995

 
410,857

 
766,167

 
(148,001
)
 
30,621,019

Fairways of Bent Tree
 
Dallas, Texas
 
8/27/2015
 
21,250,000

 
2,531,703

 
17,831,291

 
303,804

 
583,201

 
(229,402
)
 
21,020,597

Spalding Crossing
 
Atlanta, Georgia
 
9/24/2015
 
41,000,000

 
5,030,283

 
34,764,848

 
399,229

 
805,640

 
(51,476
)
 
40,948,524


(1) Purchase price excludes closing costs and acquisition expenses.
The table below summarizes the total revenues, net loss, and acquisition costs of the Company's 2015 acquisitions:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
Multifamily Community
 
2015
 
2015
Uptown Buckhead
 
 
 
 
 
Total Revenues
 
$
682,087

 
$
1,422,035

 
Net Loss
 
(522,032
)
 
(918,747
)
 
Acquisition Costs
 
6,666

 
169,078

 
Acquisition Fee
 
5,773

 
737,058

Farrington Lake
 
 
 
 
 
Total Revenues
 
$
973,928

 
$
1,441,546

 
Net Loss
 
(1,071,719
)
 
(2,034,669
)
 
Acquisition Costs
 
5,845

 
(154,483
)
 
Acquisition Fee
 
6,097

 
1,103,089

Mayfair Chateau
 
 
 
 
 
Total Revenues
 
$
344,488

 
$
344,488

 
Net Loss
 
(751,163
)
 
(751,163
)
 
Acquisition Costs
 
514,398

 
514,398

 
Acquisition Fee
 
778,734

 
778,734

Fairways of Bent Tree
 
 
 
 
 
Total Revenues
 
$
239,179

 
$
239,179

 
Net Loss
 
(507,416
)
 
(507,416
)
 
Acquisition Costs
 
122,489

 
122,489

 
Acquisition Fee
 
520,869

 
520,869

Spalding Crossing
 
 
 
 
 
Total Revenues
 
$
67,922

 
$
67,922

 
Net Loss
 
(334,284
)
 
(334,284
)
 
Acquisition Costs
 
129,749

 
129,749

 
Acquisition Fee
 
924,329

 
924,329



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of in-place rental leases. The gross value of acquired in-place leases totaled $5.4 million and $1.5 million as of September 30, 2015 and December 31, 2014, respectively, net of accumulated amortization of $2.8 million and $351,363, respectively. The weighted average remaining life of the rental leases is six months as of September 30, 2015. Amortization for the three months ended September 30, 2015 and September 30, 2014 was $1,096,910 and $117,121, respectively. Amortization for the nine months ended September 30, 2015 and September 30, 2014 was $2.4 million and $175,682, respectively. As of September 30, 2015, expected amortization for the rental leases for the next 12 months is $1.5 million.
NOTES 8 - MORTGAGE NOTES PAYABLE
The following is a summary of the Company's mortgage notes payable as of September 30, 2015:
 
 
Balance Outstanding at
 
Maturity
Date
 
Interest Rate
 
Average
Monthly Debt
Service
 
 
 
Interest Expense
Collateral
 
September 30, 2015
 
 
September 30, 2015
 
 
 
 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015
Adair off Addison
 
$
7,465,000

 
7/1/2024
 
2.56
%
 
$
15,944

 
(1) (3)
 
$
48,887

 
$
144,446

Overton Trails Apartment Homes
 
31,075,000

 
1/1/2025
 
2.10
%
 
54,471

 
(1) (3)
 
166,660

 
491,539

Uptown Buckhead
 
20,200,000

 
7/1/2025
 
2.39
%
 
40,740

 
(1) (3)
 
124,544

 
125,894

Farrington Lakes
 
32,000,000

 
7/10/2020
 
1.89
%
 
47,970

 
(1) (4)
 
129,105

 
129,105

Mayfair Chateau - Key Bank
 
18,690,882

 
11/1/2021
 
4.73
%
 
103,568

 
(1)
 
89,034

 
89,034

Mayfair Chateau - Capital One
 
2,748,419

 
11/1/2021
 
5.40
%
 
15,723

 
(2)
 
12,794

 
12,794

Mayfair unamortized fair value adjustment
 
698,571

 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
112,877,872

 
 
 
 
 
 
 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1930% (as of September 30, 2015) plus a fixed margin
(2)
Fixed rate
(3)
Variable rate hedged with interest rate cap cash flow hedge
(4)
Fixed rate interest rate swap associated with the variable rate debt
On June 4, 2014, in connection with the acquisition of Adair off Addison, the Company entered into a $7.5 million, secured mortgage loan with Berkadia Commercial Mortgage, LLC (the "Adair Mortgage Loan"), secured by Adair off Addison. The Adair Mortgage Loan, which matures on July 1, 2024, bears interest at a floating rate of one-month LIBOR plus 2.37%. Monthly payments are initially interest only. Beginning with the August 2018 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $28,000 per month.
On December 19, 2014, in connection with the acquisition of Overton Trails Apartment Homes, the Company entered into a $31.1 million, secured mortgage loan with M&T Realty Capital Corporation (the "Overton Mortgage Loan"), secured by Overton Trails Apartment Homes. The Overton Mortgage Loan, which matures on January 1, 2025, bears interest at a floating rate of one-month LIBOR plus 1.90%. Monthly payments are initially interest only. Beginning with the February 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $109,000 per month.
On June 30, 2015, the Company entered into a $20.2 million secured mortgage loan with Prudential Multifamily Mortgage, LLC (the "Uptown Buckhead Mortgage Loan"), secured by Uptown Buckhead. The Uptown Buckhead Mortgage Loan, which matures on July 1, 2025, bears interest at a floating rate of one-month LIBOR plus 2.22%. Monthly payments are initially interest only. Beginning with the August 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $74,000 per month.
    


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


On July 28, 2015, the Company entered into a $32.0 million secured mortgage loan with Bank of America, N.A. (the "Farrington Lakes Mortgage Loan"), secured by Farrington Lakes. The Farrington Lakes Mortgage Loan, which matures on July 10, 2020, bears interest at a floating rate of one-month LIBOR plus 1.70%. Monthly payments are initially interest only. Beginning with the August 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $85,000 per month.
On August 21, 2015, in connection with the acquisition of Mayfair Chateau, the Company assumed a $18.7 million secured mortgage loan with Key Bank (the "Mayfair Key Bank Mortgage Loan"), secured by Mayfair Chateau. The Mayfair Chateau Key Bank Mortgage Loan, which matures November 1, 2021, bears interest at a fixed rate of 4.73%. Monthly payments include interest and principal, in the amount of approximately $104,000 per month.
On August 21, 2015, in connection with the acquisition of Mayfair Chateau, the Company assumed a $2.7 million secured mortgage loan with Capital One (the "Mayfair Capital One Mortgage Loan"), secured by Mayfair Chateau. The Mayfair Chateau Capital One Mortgage Loan, which matures November 1, 2021, bears interest at a fixed rate of 5.40%. Monthly payments include interest and principal, in the amount of approximately $16,000 per month.
On August 21, 2015, the Company recorded a fair value adjustment, which represented the fair value of the debt assumed over its principal amount in connection with Mayfair Chateau acquisition. The fair value will be amortized to interest expense over the term of the related mortgages loans using the effective interest method. As of September 30, 2015, the net unamortized fair value of debt assumed adjustment was $698,571 and was included as a component of mortgage loans payable in the accompanying consolidated balance sheets.
Annual principal payments on the mortgage notes payable for each of the next five 12-month periods ending September 30 and thereafter, are as follows:
2016
$
455,085

2017
1,299,301

2018
1,905,854

2019
2,047,968

2020
32,741,616

Thereafter
73,729,477

Total mortgage payments
$
112,179,301

Plus: Unamortized fair value adjustment
698,571

 
112,877,872

The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. The Company has guaranteed the mortgage notes by executing a guarantee with respect to the properties. These exceptions are referred to as “carveouts.” In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents. The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. The Company has also guaranteed the completion and payment of costs of completion of no less than $1.8 million for renovations at Uptown Buckhead by June 30, 2017. For the Farrington Lakes Mortgage Loan, beginning with the calendar quarter ended December 31, 2017, the property must maintain a certain level of debt service coverage.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 9 - DEFERRED FINANCING COSTS
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. As of September 30, 2015 and December 31, 2014, accumulated amortization of deferred financing costs was $97,793 and $9,581, respectively. Amortization of deferred financing costs for the next five 12-month periods ending September 30 and thereafter, is as follows:
2016
$
269,821

2017
267,163

2018
183,101

2019
260,078

2020
255,774

Thereafter
496,066

 
$
1,732,003

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss for the nine months ended September 30, 2015:
 
Unrealized loss
on derivatives
January 1, 2015
$
(34,468
)
Change in unrealized loss on designated hedge
(99,862
)
September 30, 2015
$
(134,330
)
NOTE 11 - RELATED PARTY TRANSACTIONS
Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with the services of its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not have any employees. The Advisor is not obligated to dedicate any specific portion of its time or the time of its personnel to the Company’s business. The Advisor is at all times subject to the supervision and oversight of the Company’s Board of Directors and has only such functions and authority as the Company delegates to it.
During the course of the offering, the Advisor will provide offering-related services to the Company and will advance funds to the Company for both operating costs and organization and offering costs. These amounts will be reimbursed to the Advisor from the proceeds from the offering, although there can be no assurance that the Company’s plans to raise capital will be successful. As of September 30, 2015, the Advisor has incurred costs on a cumulative basis on behalf of the Company of approximately $4.4 million.
Relationship with the Advisor
The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's Board of Directors. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 2.5% of gross offering proceeds. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.
On June 4, 2014, the Advisor provided a $1.3 million bridge loan (the “Bridge Loan”) to the Company. The Company used the proceeds of the Bridge Loan to partially finance the acquisition of Adair off Addison. The Bridge Loan, which was scheduled to mature on December 4, 2014, incurred interest at an annual rate of LIBOR plus 3.0%. The Company repaid the Bridge Loan in full on June 30, 2014 and paid $2,242 in interest during 2014.    
Relationship with RAI
Self-insurance funds held in escrow. The receivable from related party includes escrow funds held by RAI for self-insurance. The Company's properties participate in an insurance pool with other properties directly and indirectly managed by RAI. RAI holds the escrow funds related to the insurance pool on its books. The insurance pool covers losses up to $2.5 million. Catastrophic insurance would cover losses in excess of the insurance pool up to $140.0 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.
Relationship with Resource Real Estate Opportunity Manager II
Resource Real Estate Opportunity Manager II, LLC (the “Manager”), an affiliate of the Advisor, manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments.
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company.
Relationship with Resource Securities
Resource Securities, Inc. (“Resource Securities”), an affiliate of the Advisor, serves as the Company’s dealer-manager and is responsible for marketing the Company’s shares during the primary portion of its public offering. Pursuant to the terms of the dealer-manager agreement with Resource Securities, the Company pays Resource Securities a selling commission of up to 7% of gross primary offering proceeds and a dealer-manager fee of up to 3% of gross primary offering proceeds. Resource Securities reallows all selling commissions earned and a portion of the dealer-manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer-manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment plan. Additionally, the Company may reimburse Resource Securities for bona fide due diligence expenses.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Relationship with Other Related Party
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), the principal owner of which is the father of RAI’s Chief Financial Officer.
The fees earned/expenses incurred and the amounts payable to such related parties are summarized in the following table:
 
September 30,
2015
 
December 31,
2014
Due from related parties:
 
 
 
Advisor
$
230,695

 
$

Resource Securities

 
3,944

RAI - self-insurance funds held in escrow
249,758

 
30,081

 
$
480,453

 
$
34,025

 
 
 
 
Due to related parties:
 
 
 
Advisor
 
 
 
Asset management fees
$

 
$
28,456

Organization and offering costs
1,072,795

 
2,272,325

Operating expense reimbursements

 
1,145,784

 
 
 
 
Manager
 
 
 
Property management fees
98,983

 
6,391

Expense reimbursements
332,874

 
39,592

 
 
 
 
Resource Securities
 
 
 
Selling commissions and dealer-manager fees
339,482

 
358,715

 
$
1,844,134

 
$
3,851,263

 
 
 
 
Graphic Images (1)
$
7,598

 
$
81,424

 
(1)
Included in Accrued expenses on the consolidated balance sheets.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Fees earned / expenses incurred:
 
 
 
 
 
 
 
Advisor
 
 
 
 
 
 
 
Acquisition fees
$
2,238,807

 
$
60,053

 
$
4,067,085

 
$
264,238

Asset management fees
$
484,578

 
$
29,635

 
996,864

 
37,130

Debt financing fees
$
267,348

 
$

 
561,048

 
37,325

Organization and offering costs
$
449,760

 
$
418,339

 
1,403,444

 
2,489,150

Overhead allocation
$
272,505

 
$
152,533

 
817,798

 
880,329

Interest expense
$

 
$
2,242

 

 
2,242

 
 
 
 
 
 
 
 
Manager
 
 
 
 
 
 
 
Property management fees
$
166,411

 
$
16,274

 
359,328

 
22,098

Construction management fees
$
134,397

 
$

 
211,224

 

Operating expense reimbursements
$
150,271

 
$
3,744

 
218,092

 
20,288

 
 
 
 
 
 
 
 
Resource Securities
 
 
 
 
 
 
 
Selling commissions and dealer-manager fees
$
7,933,760

 
$
1,332,915

 
26,281,478

 
1,520,817

 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Graphic Images
$
95,667

 
$
76,686

 
368,452

 
239,078

NOTE 12 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10,000,000 shares of its $0.01 par value preferred stock. As of September 30, 2015, no shares of preferred stock were issued or outstanding.
Convertible Stock
As of September 30, 2015, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor and affiliated persons. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 7% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Each of these two events is a “Triggering Event.”  Upon a Triggering Event, the Company's convertible stock will, unless its advisory agreement has been terminated or not renewed on account of a material breach by its Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
(A)
the lesser of
(i)    25% of the amount, if any, by which
(1)
the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds
(2)
the sum of the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, or
(ii)    15% of the amount, if any, by which
(1)
the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds
(2)
the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by
(B)
the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.      
Common Stock
As of September 30, 2015, the Company had an aggregate of 32,689,955 shares of $0.01 par value common stock outstanding, including the Advisor's additional purchase of 117,778 shares of common stock for $1.1 million, as follows:
 
 
Shares Issued
 
Gross Proceeds
Initial public offering
 
31,892,619

 
$
317,742,273

Shares issued through stock distributions
 
246,365

 

Shares issued through distribution reinvestment plan
 
541,013

 
5,139,624

Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
150,000

Redemptions
 
(5,042
)
 
(50,000
)
 
 
32,689,955

 
$
322,981,897



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Redemptions
During the nine months ended September 30, 2015, the Company redeemed shares as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price Paid per Share
 
Cumulative Number
of Shares Purchased
as Part of a Publicly
Announced Plan or
Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
January 2015
 
 
$—
 
 
(2) 
February 2015
 
 
$—
 
 
(2) 
March 2015
 
5,042
 
$9.92
 
5,042
 
(2) 
April 2015
 
 
$—
 
 
(2) 
May 2015
 
 
$—
 
 
(2) 
June 2015
 
 
$—
 
 
(2) 
July 2015
 
 
$—
 
 
(2) 
August 2015
 
 
$—
 
 
(2) 
September 30, 2015
 
 
$—
 
 
(2) 

(1)
All purchases of equity securities by the Company in the nine months ended September 30, 2015 were made pursuant to the Company's share redemption program.
(2)
The Company currently limits the dollar value and number of shares that may be repurchased under the program, as discussed below.
All redemption requests tendered were honored during the nine months ended September 30, 2015.
The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption.  Generally, the cash available for redemption will be limited to proceeds from the distribution reinvestment plan plus, if the Company had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.  These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility.      
Distributions
For the nine months ended September 30, 2015, the Company paid aggregate distributions of $8.2 million, including $3.2 million of distributions paid in cash and $4.9 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows:


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Authorization Date
 
Per
Common
Share
 
Record Dates
 
Distribution Date
 
Distributions
reinvested in shares
of Common Stock
 
Net Cash Distributions
 
Total Aggregate
Distributions
November 13, 2014
 
$
0.00164384

 
December 31, 2014 through January 29, 2015
 
January 30, 2015
 
$
169,967

 
$
89,412

 
$
259,379

January 26, 2015
 
0.00164384

 
January 30, 2015 through February 26, 2015
 
February 27, 2015
 
208,353

 
115,274

 
323,627

January 26, 2015
 
0.00164384

 
February 27, 2015 through March 30, 2015
 
March 31, 2015
 
352,604

 
208,396

 
561,000

March 24, 2015
 
0.00164384

 
March 31, 2015 through April 29, 2015
 
April 30, 2015
 
465,774

 
290,181

 
755,955

March 24, 2015
 
0.00164384

 
April 30, 2015 through May 28, 2015
 
May 29, 2015
 
538,684

 
352,751

 
891,435

March 24, 2015
 
0.00164384

 
May 29, 2015 through June 29, 2015
 
June 30, 2015
 
681,964

 
468,622

 
1,150,586

June 25, 2015
 
0.00164384

 
June 30, 2015 through July 30, 2015
 
July 31, 2015
 
758,820

 
521,511

 
1,280,331

June 25, 2015
 
0.00164384

 
July 31, 2015 through August 30, 2015
 
August 31, 2015
 
849,012

 
583,455

 
1,432,467

June 25, 2015
 
0.00164384

 
August 31, 2015 through September 29, 2015
 
September 30, 2015
 
899,613

 
619,039

 
1,518,652

 
 
 
 
 
 
 
 
$
4,924,791

 
$
3,248,641

 
$
8,173,432

On September 18, 2015, the Company's Board of Directors authorized cash distributions to the stockholders of record at the close of business each day in the period commencing September 30, 2015 through December 30, 2015 equal to a daily amount of $0.00164384 per share of common stock, payable on October 30, 2015, November 30, 2015 and December 31, 2015. We have accrued these distributions, which are included in Distributions payable on the consolidated balance sheets.
NOTE 13 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, the Company expects that changes in classifications between levels will be rare.
The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.    

Derivatives (interest rate caps) which are reported at fair value in the consolidated balance sheets are valued by a third party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors (Level 2).

The following table presents information about the Company's assets measured at fair value on a recurring basis and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
30,723

 
$

 
$
30,723

 
$

 
$
30,723

 
$

 
$
30,723

Liabilities:
 
 
 
 
 
 
 
Cancelable swap
$

 
$
(380,474
)
 
$

 
$
(380,474
)
 
$

 
$
(380,474
)
 
$

 
$
(380,474
)
 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
53,002

 
$

 
$
53,002

 
$

 
$
53,002

 
$

 
$
53,002

Interest rate caps are included in Prepaid expenses and other assets on the consolidated balance sheets. Cancelable swaps are included in Derivative liabilities on the consolidated balance sheet.
The carrying amount and fair value of the Company’s mortgage notes payable are as follows:
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Mortgage notes payable
$
112,877,872

 
$
114,044,908

 
$
38,540,000

 
$
38,540,000

The fair value of the mortgage notes payable with fixed interest rates was estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3). The fair values of four of the mortgage notes payable with variable interest rates equals the carrying amounts because the interest rate of each of the mortgage notes payable is variable. (Level 3).


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


NOTE 14 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition of the Company’s mortgage loans, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into two interest rate caps that were designated as a cash flow hedges during 2014. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2015, such derivatives were used to hedge the variable cash flows, indexed to London InterBank Offered Rate ("LIBOR"), associated with an existing variable-rate loan agreement. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the nine months ended September 30, 2015, the Company did not record any hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of September 30, 2015, the Company had the following outstanding interest rate derivatives:
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Maturity Dates
Derivatives designated as hedging instruments:
Interest rate caps
 
3
 
$
58,740,000

 
January 1, 2018 to July 1, 2019
Derivatives not designated as hedging instruments:
Cancelable swap
 
1
 
$
32,000,000

 
July 28, 2020
Tabular Disclosure of Fair Value of Derivative Instrument on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments, which are included in prepaid expenses and other assets and derivative liability on the consolidated balance sheets:
Asset Derivatives
 
Liabilities Derivatives
September 30, 2015
 
December 31, 2014
 
September 30, 2015
 
December 31, 2014
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Interest rate caps
 
$
30,723

 
Interest rate caps
 
$
53,002

 
NA
 
$

 
NA
 
$

NA
 
$

 
NA
 

 
Cancelable swap
 
(380,874
)
 
NA
 



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2015
(unaudited)


Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2015 and 2014:
 
 
 
 
Amount of Gain (Loss) Recognized in Income for the Three Months Ended
 
Amount of Gain (Loss) Recognized in Income for the Nine Months Ended
Derivatives Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Interest rate caps
 
Interest expense
 
$
(180
)
 

 
$
(365
)
 

 
 
 
 
Amount of Gain (Loss) Recognized in Income for the Three Months Ended
 
Amount of Gain (Loss) Recognized in Income for the Nine Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Cancelable swap
 
Interest expense
 
$
(477,668
)
 

 
$
(477,668
)
 

NOTE 15 - OPERATING EXPENSE LIMITATION
As required under the Company's charter, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of the average invested assets or 25% of net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined under GAAP, that are in any way related to operations, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property). Operating expenses for the four quarters ended September 30, 2015 exceeded the charter imposed limitation; however, the conflicts committee of the board of directors determined that the excess was justified for these periods given the costs of operating a public company and the early stage of the Company's operations.
NOTE 16 - SUBSEQUENT EVENTS

On October 29, 2015, the Company purchased a 188-unit multifamily community located in Portland, Oregon from an unaffiliated seller for $32.8 million.
The Company has evaluated subsequent events and determined that no additional events have occurred which would require an adjustment to the consolidated financial statements.






ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, RRE Opportunity OP II, LP, a Delaware limited partnership, and to their subsidiaries.
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
Overview
We are a Maryland corporation that intends to invest in multifamily assets across the entire spectrum of investments in order to provide investors with growing cash flow and increasing asset values. Our targeted portfolio will consist, at the time of acquisition, of commercial real estate assets, principally (i) underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which we will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans we originate or purchase either directly or with a co-investor or joint venture partner. We anticipate acquiring approximately 60% of our total assets in category (i) listed above, 20% of total assets in category (ii) listed above, and 20% of our total assets in category (iii) listed above. We believe multiple opportunities exist within the multifamily industry today and will continue to present themselves over the next few years to real estate investors who possess the following characteristics: (i) extensive experience in multifamily investing, (ii) strong management platforms specializing in operational and financial performance optimization, (iii) financial sophistication allowing them to benefit from complex opportunities and (iv) the overall scale and breadth of a national real estate platform in both the equity and debt markets. If we are only able to raise an amount substantially less than our maximum offering, our plan of operation will be scaled down considerably and we would expect to acquire a limited number of assets. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource Real Estate Opportunity Advisor II, LLC, our external advisor, or the Advisor, presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code, and to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, our portfolio composition may vary from what we initially expect.
We commenced the public offering of our common stock in February 2014. We describe this offering in “Liquidity and Capital Resources,” below.
Results of Operations
We were formed on September 28, 2012.  We commenced active real estate operations on June 4, 2014 with the acquisition of our first multi-family property.  As of September 30, 2015, we owned seven multifamily properties. Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or income to be derived from the operation of such assets or those that we expect to acquire.



Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014
The following table sets forth the results of our operations:
 
Three Months Ended
 
September 30,
 
2015
 
2014
Revenues:
 
 
 
Rental income
$
3,871,888

 
$
342,437

Interest income
41,888

 
1,505

Total revenues
3,913,776

 
343,942

 
 
 
 
Expenses:
 
 
 
Rental operating
2,245,165

 
230,517

Acquisition costs
3,018,033

 
60,053

Management fees - related parties
650,989

 
8,683

General and administrative
668,544

 
430,186

Loss on disposal of assets
658,606

 

Depreciation and amortization expense
2,405,596

 
193,910

Total expenses
9,646,933

 
923,349

 Loss before other expense
(5,733,157
)
 
(579,407
)
 
 
 
 
Other expense:
 
 
 
Interest expense
(1,098,071
)
 
(53,523
)
Net loss
$
(6,831,228
)
 
$
(632,930
)
Revenues. During the three months ended September 30, 2015, our revenue was primarily from the rent of our multifamily properties, which increased from one property at September 30, 2014 to seven properties at September 30, 2015.
Expenses.  Our operating expenses for the three months ended September 30, 2015 were from the ongoing operations of our business and the ownership of seven operating properties. Accordingly, we incurred increased management fees, general and administrative expenses, and depreciation and amortization expenses.  
General and administrative expenses were $668,544, primarily related to the following:
Company level expenses included $36,353 of director and officer's insurance, $40,306 of director fees, $31,474 of proxy solicitation fees and $51,297 of professional fees.
Property level expenses of $406,279 were related to the operations of our seven multifamily properties.
Acquisition costs of $3.0 million related to the acquisitions of Mayfair Chateau, Fairways of Bent Tree and Spalding Crossing, multifamily properties purchased with an aggregate purchase price of $92.3 million.
Loss on disposal of assets increased from $0 for the three months ended September 30, 2014 to $658,606 for the three months ended September 30, 2015, primarily related to the increase in properties owned.
We recorded $1.1 million of interest expense related to the mortgage loans secured by five of our multifamily properties, amortization of deferred financing costs, amortization of the fair value of debt assumed and the fair value adjustment for our interest rate swap.



Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014
The following table sets forth the results of our operations:
 
Nine Months Ended
 
September 30
 
2015
 
2014
Revenues:
 
 
 
Rental income
$
8,303,029

 
$
455,076

Interest income
86,973

 
1,787

Total revenues
8,390,002

 
456,863

 
 
 
 
Expenses:
 
 
 
Rental operating
4,432,909

 
270,542

Acquisition costs
5,177,264

 
329,444

Management fees - related parties
1,356,192

 
59,228

General and administrative
2,216,195

 
1,117,506

Loss on disposal of assets
1,669,835